How Much of Your Income Should You Spend on Your Vehicle?

General wisdom says you should budget either 10 percent of your take-home pay or 20 percent of your gross pay for your vehicle each year. But don’t jump to the calculator just yet. Although using your income as a guideline to help you purchase a vehicle is a required start, look at the whole picture. The sticker price is not the only price you’ll be paying.

Car Maintenance Costs

According to a report on Global News, budget between $500 and $700 a year for routine maintenance. Consumer Reports found through a survey that drivers had spent between $10 and $390 in maintenance and repairs during their vehicle’s third year of ownership. Those amounts skyrocketed to a range of $315-$1,125 during the past year of a 10-year-old vehicle. (The article noted that some brands offer free maintenance for the first few years.)

Car maintenance costs
Car maintenance costs


As I discussed in a previous post, insurance costs are becoming more random nowadays. Before you purchase a vehicle, whether new or used, contact your broker to get quotes. Then add it to your annual costs. In addition, you may want to ensure you have enough money for your deductible set aside in case you get into an accident.

Interest Rates

If you’re not paying for your car in full upfront, you can’t escape interest rates. Although a vehicle selling for $20,000 might look affordable at $5,000 a year, the math doesn’t work out that way. Your dealer should, of course, explain everything out to you, but if you’re price shopping, use one of the many interest calculators online to give you a better idea of what you might pay monthly.

A note for those with a poor credit score rating: You may have to pay extremely high-interest rates. Don’t get tempted into a long-term, high-interest rate contract because you like the car. Find one you can afford, including all the costs discussed in this post, enter into a short-term lease, e.g., two years, make each payment on time, and then consider purchasing another vehicle. Regular payments can help lower your interest rates down the road.

Do Your Household Budget

Calculating 10 percent of your take-home salary for your vehicle doesn’t give you the entire picture. You also need to find out if you have that much money available to spend. Add up your mortgage/rent payments, utilities, groceries, entertainment, home maintenance, daily coffee…all of it. If you don’t have 10 percent of your take-home salary leftover after you’ve written up your budget, you don’t have that money available for a vehicle.

When it comes right down to it, you want to enjoy your car. But your dream could become a nightmare if you buy something too expensive. Do the legwork, find the right car for your budget, and then enjoy the ride.

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